Should You Depend on Dividend Stocks? Part 2: Dividend Stocks vs. Total Return Investing
In Part 1 of Should You Depend On Dividend Stocks? we described why dividend investing—or, buying up stocks known for attractive dividends—may not be an ideal strategy for generating a dependable income stream out of your investment portfolio.
In this blog, we’ll look at why we typically prefer a total return investment strategy over more concentrated dividend stock portfolios in many circumstances, including retirees who are drawing income out of their portfolios. Here are two questions for homing in on a more comprehensive way to build and spend your lifetime wealth:
1. Investing: As you invest and accumulate wealth over time, how can you pursue a potentially higher total return over time, given the level of market risk you can tolerate?
2. Divesting: As you take income out of your portfolio, how can you maintain its risk-managed structure, while generating tax-efficient withdrawals over time?
Where dividend investing can fall short on these pivotal counts, total return investing is structured to directly address them, head on.
How Does Total Return Investing Work?
Bottom line, there are essentially three ways any given investment can reward investors:
1. Interest/Dividends: A security can pay out more or less interest or dividends.
2. Capital Appreciation: A security can offer higher or lower capital gains or losses (based on how much you pay per share versus how much your shares are worth when you sell them).
3. Cost Control: As you buy and sell your holdings, you can incur more or fewer taxes and other costs that eat into your returns.
Instead of seeking to isolate and maximize dividends as a single solution, total-return investing seeks to make best use of all three of these potential money-making tools as they apply to you, your investment opportunities, and your personal financial goals.